Lamar Advertising Co (LAMR) 2010 Q1 法說會逐字稿

We now have Kevin Reilly, Sean Reilly and Keith Istre in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of the Company's presentation, we will open the floor for questions. (Operator Instructions). In the course of this discussion, Lamar may make forward-looking statements regarding the Company, including statements about its future financial performance, strategic goals and plans. Lamar has identified important factors that could cause actual results to differ materially from those discussed in this call and the Company's reports on Forms 10-K and 10-Q and the registration statements that Lamar files with the SEC from time to time. Lamar refers you to those documents. Lamar's first quarter 2010-2009 earnings release, which contains the information required by Regulation G, was furnished to the SEC on a Form 8-K this morning and is available on Lamar's website, www.lamar.com.

I would now like to turn this conference over to Kevin Reilly. Mr. Reilly, you may begin.

Thank you, Chantelle. I want to welcome everyone to our Q1 quarterly call. As is our custom, we will make some brief comments and then turn the call over to the field for any questions that you might have. I am going to to ahead and kick it off and then turn it over to Keith, and Keith will turn it over to Sean. We are very pleased with our bookings, and slow and steady is the best way to describe where we think we are headed for the rest of the year. Our analog business is certainly slow and steady. Our digital business looks a little bit more like a radical [V]. Of course, it fell a lot faster. It is coming back a lot faster and it looks similar to television and radio. Some might wonder about slow and steady versus a quicker comeback, and I think you could just look to one category. That would be national auto spend. We don't get the benefit of national auto spend as much as some others might. That has been a significant catalyst for others, but we do expect as the year progresses, that our local automotive is going to kick in quite nicely. With that, I would like to turn the call over to Keith Istre.

Just some brief color on the first quarter. The revenue, of course our guidance for the quarter was down 1% and that's where we ended up. To give you an indication of the pattern for the quarter, in January our revenue on a pro forma basis was down 2.7%. So we got a little bit of a slow start. Our best guess is that was due to some holiday hangover and some apprehension on advertisers' part about what 2010 was going to actually look like. Anyway, in February revenue was down only 0.2 of a point. And in March, it was positive 0.6%. So that's how we ended up at down 0.7% for the quarter. Our guidance for Q2, as you saw in our release, was up 2% as the positive trend that we experienced in March continues on into the second quarter. To touch on expenses for the first quarter, you saw that pro forma expense, expenses declined 2.6%. Remember that the majority of our expense cuts took place in the fourth quarter of 2008 and the first quarter of 2009. So we were still experiencing some positive comps in Q1 2009. Q2 and Q3 expense comp for 2009 are going to be more challenging than Q1 2009 was.

As such, on the last call we guided to expense growth for 2010 of approximately 2%. We still think that that's a reasonable expectation for the full year. We are not giving out expense guidance by quarter because the quarters were not even as far as their reductions last year. There were some peaks and valleys. But in any case, we think 2% is a good number to use when modeling. Last free cash flow was down in Q1 approximately 9%. That was mainly due to the increase in interest expense from the debt refinancing activity that took place at the end of Q1 and beginning of Q2 last year. It increased the cost of our debt. We issued some new senior notes and amended our old [bank] agreement. That increase won't be repeated. That increase in interest won't be repeated Q2 or the rest the year, obviously unless the floating interest rates rise significantly. We also did some additional refinancing, which you saw in the Q -- in the second quarter of this year, and due to that, there should be a reduction in our cash interest on an annualized basis of about $15 million due to the more favorable interest pricing that we have gotten on our new bank credit facility. With that, I will turn it over to Sean.

Thanks, Keith. Let me talk about digital first . As Kevin mentioned, digital really continues to perform extremely well. As of this call, we have 1153 digital units in the air and 139 markets. And 585 of those are bulletins and 568 are posters. For the first quarter our same board performance year-over-year was up 15% for digital. In April, our same board performance for digital was up 20%. And because of the 50 or so additional units we added over the year, our actual digital billing was up 27% in April year-over-year, and that represented about 12% of our April billings. So, our digital product, our shortest cycle, highest CPM product is performing extremely well. Moving over to the analog side of the business, let me gave you some rate and occupancy stats. For posters, our occupancy in Q1 2010 was 59% as opposed to Q1 2009 of 52%. And for bulletins, our occupancy for Q1 2010 was 70% as opposed to 68% in Q1 2009. So occupancy is ticking up nicely. On rate, for posters, Q1 2010, the average rate per poster was $406. That compares to an average rate in Q1 2009 of $430. So the poster rate dropped approximately 5% year-over-year in Q1. For bulletins, Q1 2010 average rate of $1,064 as compared to Q1 2009 of $1,106 or a drop of approximately 4%.

What we are seeing in rate is a good trend sequentially as the months progress. Just to highlight bulletins, as we progressed through the quarter, and got to March, bulletin rate for March was down only 1.6%. So, sequentially, the way that went, January down 5.5%, February down 4.2%, and March, as I mentioned, down 1.6%. So that trend is looking good. On national business as opposed to local business, in the Q1, national was marginally stronger than local. National was up 3% in Q1 pacing up 3% in Q2, and in fact pacing up 3% for the full year. So, national is marginally stronger. We do expect local to catch up as the year progresses. On our verticals, let me tick through the top ten real quick and then give you some color. Restaurants were 12% of our book in 2010; retail, 10%; hospitals and healthcare, 9%; other service industries, 8%; gaming, 7%; automotive, 6%; amusements entertainment and sports, 6%; financial, 5%; hotel/motel, 5%; telecom, 5%. Retail went positive year-over-year in March as a vertical. Auto went positive year-over-year in April as a vertical. So as we sit today, all of our top ten verticals are now positive year-over-year, with the exception of hotel/motel. The recovery in the hotel/motel business is lagging the other nine verticals. So that's the story on the Ops side. We're happy to open it for

Chantelle?

Thank you. Ladies and gentlemen, at this time, we would now like to open up the floor for questions. (Operator Instructions). Our first question will come from Marci Ryvicker, Wells Fargo.

Thanks. Two questions. Sean, do you feel like you cut rate too far too fast .during the recession? I know you gave us trends. They look good. But when do you turn positive, and are there some products that are positive right now in terms of price?

We are in positive territory on digital and we were in the first quarter. So, again that story is intact. Given the trends that we are seeing, hopefully we will be able to report positive pricing in both analog products sometime in the second quarter. Our MO, as we typically have gone through recessions, was to try to hold the line on price and suffer an occupancy, and then as recoveries take hold, occupancy comes back faster. Obviously this particular ad recession was deeper and more prolonged than anything any of us has ever experienced. While we tried to hold the line as best we could, we couldn't do it as well as we had in the past. But I am liking the trends I am seeing.

Can I have one follow up? Looking longer term I guess, this is for Kevin. What is the margin potential once revenue does come back?

I think a lot of that depends on how many digital units we add to the portfolio over the next several years. But, if you just assume a steady state, I don't see any reason, with the expense measures that we have taken. And many of those expense cuts are sustainable, especially since we've added this new [sub-strate], which is much lighter and allows us to roll fewer trucks with fewer people. So, I think you should count on us approaching 50%.

Great, thank you so much.

Thank you. Our next question will come from Jason Helfstein, Oppenheimer.

Thanks. Few questions. Sean, do you have handy what the digital contribution was in the quarter? And then I have got a follow-up.

I had a count for April. It was 12% of our book. Do we have it for the first quarter?

11.5%.

Roughly, 11%, 11.5%, Jason.

And then when you guys think of longer term, what do you think the maximum number of digital displays you could possibly deploy from the two vendors and yourself on an annual basis? And then on the capital side, when do you feel comfortable redeploying the cash flow as opposed to paying down debt or doing something else? Thanks.

Unfortunately, Jason, the answer is still the same. The exercise throughout the country is on a one-off basis. We still have some significant regulatory constraints. But we are making progress and we are getting quite a bit of support, not only from our customers but also from many municipalities across the country. So, if we keep doing our work, I think that digital will make a significant contribution to our business. But we as a Company are not willing to jump out there and speculate on what percentage of our business is going to be digital.

Well, I will ask it a different way. What should the -- which states or area should we be the most focused on as far as looking for you to make headway on the regulatory side? Do you think there a natural constraint to physically the number that could be put up based on the suppliers of the displays?

f you look, Jason, when we were being extremely aggressive and the ad climate was strong, putting up one or two a business day, because these are all little individual construction projects, was pretty much about the pace you could go. Even assuming no financial constraints or regulatory constraints or market constraints. As the market continues to strengthen for digital and as our local general managers start requesting additional units, slowly over the next 12 to 18 months, we're going to start ramping up to that pace again. But I think it is a little premature just yet.

Where should we focus from a news flow on watching the regulatory process move forward?

At the state level, we have pretty much won. Most of the state DOTs, with very, very few exceptions, are on board and supportive. There are some local municipalities where there are skirmishes going on, probably of most note is Los Angeles. You probably might want to keep your eye out for what is going on there.

Thank you.

Our next question will come from Alexia [Quadrani], JPMorgan.

Hi, thank you. Just a couple of questions. First, could you comment on how pricing is trending in your large markets versus your small markets? And the second question is, it may be too early to tell, but any preliminary guidance on CapEx for next year given up the likely ramp-up in digital?

Well, pricing has firmed up in the smaller and middle markets faster than in the large markets. And we are tracking that. And it is sort of a market by market analysis. I don't want to get too granular on it, other than to say that middle and smaller has probably actually already turned positive.

We are not really prepared to talk about CapEx for next year. But just to kind of put it in context for you, I believe our total digital expenditure in 2007, it was in the -- $100 million-dollar range.

$100 million range.

It was in the $100 million range, digital only.

And t hat would be a good starting point you are suggesting for next year in addition to what your maintenance would be?

No, we've --

No, because --

Prices are coming down.

Prices are different. The amount of fiscal work that we have to do to structure to accommodate these things, -- electrical work is different. So, I think we will get more units for less. We will get the same amount of units but there will be less spent. But that's a little bit out, so we are not really prepared to give you a number.

And then if you look at your maintenance CapEx for this year. Do you think that's a good run rate going forward or is it too low?

No, that will be the same number. That is a good number for the foreseeable future.

Thank you.

Thank you. Our next question will come from Anthony [DeClemente], Barclays Capital.

Hi, thank you for taking my question. This is moe of a big picture industry question about outdoor. Are you at all surprised at the fact that outdoor seems to be coming back a bit more slowly than other forms of local ad media? And when I look at thos other forms, I think of TV stations. which are pacing up in the mid- to high- teens, or radio, which is actually up high single-digits or low double-digits. I'm talking about revenue. And even newspapers. So it just seems like there is maybe even a little bit of a share shift going on that I wouldn't have expected. So I am wondering if it has to do with the lag in the cycle? Or really what it is and if you guys as managers are surprised by that.

Not really.

No, we are not surprised. We didn't quite fall as far. And as I mentioned in my opening statement, that we don't benefit as much as others from national automotive. If you look at what has happened with the automatic ad spend over the quarter or so, it has been pretty remarkable. And the other outlets have been the primary beneficiaries.

Those other outlets had a higher beta going through the thing. They fell further and had easier comps coming back on the upswing. It is notable to see how our digital business is performing. It's a higher CPM, shorter cycle sale. And this recovery looks a lot like theirs.

It is tracking broadcast. It fell further and it's tracking broadcast identically. So, no, given the nature of our bulletin contracts and the preponderance of local ad spin that makes up the revenues, we are not surprised at all.

Okay. Thank you very much.

Thank you. Our next question will come from Paul Sweeney, Bloomberg Research.

Thank you very much. Good morning. A couple of questions. First, if you could just give us a sense here as we are in May about the visibility of your book of business for the remainder of the year and perhaps compare that to last year and perhaps more normalized levels that you have seen in the past. Kind of where we are there? And second, to the extent we are coming out of this advertising recession, I wonder if could give us a sense what your managers are telling you in terms of some of the smaller [tuck] in acquisition opportunities. Are you seeing those out there? And perhaps what valuations might be and how you think about use of capital for those, which have historically been very high return uses of capital for you. Thanks.

Paul, glad to hear from you. I see you haven't gotten rid of that habit about trying to coax forward-looking statements out of us.

Old habits.

Diehard. I don't think we are not going to help you out much on the pacing side. But Sean can probably help you out on the M&A front.

It is all quiet out there right now, Paul, for a couple of reasons. Really good outdoor assets are run by good operators who don't want to sell in a downturn. They want to wait until things get better and sell when things get better. That's reason number one. Reason number two, if you look at the highest and best use of our capital right now, I would say digital comes first. So when we start opening up the spigot, I think the best thing for the shareholders would be to continue to add digital units and deploy the capital there.

Thanks very much.

Thank you. Our next question will come from Ben Swinburne, Morgan Stanley.

Thank you. Good morning. I've got a couple of questions, one on the balance sheet and one on digital. On digital, in the markets where you have got the most digital inventory deployed, I am curious if you are getting the sense that you are taking share from other local advertising platforms in that market as you add digital capacity or sell more digital. Or are you seeing some movement of money out of your analog boards into the digital? It's sort of take on your answer, I think, to Anthony's question about how digital is moving quicker and whether that is somewhat cannibalistic or that's incremental. And then on the balance sheet, I think you have a decent amount of floating rate debt , and conventional wisdom -- I don't know if we should take it as accurate -- but most people seem to think that rates are going higher. I'm just curious if you have a plan in place on hedging or how you are thinking about that piece on the interest

Let me hit the digital question first. One thing that I would caution everybody on is sort of secular versus cyclical analysis. We are still coming out of a severe cyclical downturn, and it would -- you have to be a little careful reading too much into monthly or quarterly data. Clearly,when the cyclical winds were steady in 2005, 2006, 2007 and even 2008, our digital units were taking share from other local media. It was almost incontrovertible. They were facing secular headwinds that we weren't. And we were posting numbers that were positive in the high single-digits, and they were posting negative numbers. Even when the world was right. I would just be careful as we come out of this thing, to read too much into monthly and quarterly data. We are still extremely bullish, as you know, on digital. Our local Management is convinced that we are not cannibalizing our analog business, and they beginning to make their plans for latter part of this year, first part of next part of next year on digital deployment. So I would just leave it at that.

Ben, on the balance sheet question, about 45% of our total debt is floating. It is about $1.1 billion under our new bank credit facility. We plan to continue to reduce that with free cash flow. We would like to be under $1 billion by the end of this year. And since the end of 2008, we have already paid back our floating rate lenders approximately $400 million. While we do anticipate rates going up, we also anticipate reducing that floating rate risk through application of the free cash flow going forward. Are we are going to look at some hedging agreements? Yes. I have some calls next week with some of our lenders to discuss that. We wanted to get all of this refinancing in place and then look at what we might do to hedge some of that floating rate debt going forward.

Very helpful. Thanks a lot, guys.

Thank you. The next question will come from Jason [Bazent] from Citi.

I have a quick question on [pricing] and one on digital. If you look at the government statistics, we are in a period where they are telling us inflation is at all-time lows and when I look in advertising, everyone seems to be adding capacity. Digital boards are going up. Mobile advertising is coming in. More page views are starting. Are you confident that we are not in a different sort of period in terms of normal advertising inflation? That's my first question. Second, tell me if this is wrong. Given how attractive the digital business seams to be based on everything you are saying, am I not right in saying that there not global agreement that the digital business is a great business? In other words, why is there a disconnect in terms of what some of the other industry players around the globe think? What makes the US dynamics different?

Well, if you certainly look at the top three -- CBS, Clear Channel and Lamar -- and our belief in digital in a traditional outdoor setting, all three are pretty much saying the same thing. That it's doing very well and our customers are responding. They know how to buy it. We know how to sell it. And we are all committed to continuing to build out with what is rapidly becoming a pretty powerful national platform. I don't know what they are saying elsewhere around the globe. And maybe they have some different issues than we have. But I feel pretty confident that our best business judgment here at Lamar has been validated by some pretty smart guys over at CBS and Clear Channel. Sort of regarding the extra capacity, that is a good question. It is something that we have to think about and keep our eye on. Now, one thing we have been doing through this downturn, is we have been actually reducing capacity on the analog side. And so as we ramp back up our digital capacity, we need our local Management to be confident that they can move the space. The way we do that, by the way, is bottom up. We don't tell a particular market that you have to put up ten digitals. Our local General Management and sales staff, who really have the pulse of the local ad spend, they tell us if there is demand.

Let me tackle the increase in capacity question --

Sure.

Sort of on a larger platform, just all out-of-home. I think that we are going to be somewhat insulated in the short run. I don't know about the long run. But in the short run, simply because if you look at all of it, it is less than 6% of total ad spend. And so small little changes in share, even as you are adding capacity, results in big increases across the platform. So, --

When you say look at all of it is 6%, you mean all of outdoor?

No. Outdoor by itself, including transit, is only about 3%. So you have to add all of these out-of-home digital opportunities, National Cinema Media, screens and other places. So, there is additional capacity coming on line. There is a lot of interest amongst advertisers regarding these other screens because they are having difficulty with their audience elsewhere. But from where we are sitting, our biggest concern is what Sean mentioned. As we add digital capacity inside our operation, how do we keep from getting too greedy as we add that capacity? How do we add it in a smart way so that we can support the entire platform and not go the route of radio and add too much capacity?

Perfect. Very helpful. Thank you.

Thank you. Our next question will come from Jim Boyle, Gilford.

Good morning. Sean, how much of 2010 is booked so far versus what percentage was booked last year at this time?

That's that pacing question we don't want to get into, Jim. I gave you a little hint when I gave you the national piece. The national pacings are up 3%. That is bookings for the whole year.

National, okay. And also, given the way you are describing digital and analog, would it be somewhat safe to assume that your digital rates, advertising rates, are being somewhat compared to TV and newspaper, where you have been poaching business, and perhaps your analog rates might be more, compared to cheaper radio rates?

I think on the digital side, absolutely. We are pricing right at about the radio umbrella. The CPM is eight, nine, ten-ish. And our billboard rate is really, I think, more compared to traditional outdoor rates. Our CPMs there are still in the $3 to $4 range. And when customers are renewing, they are not really comparing it to any other pricing umbrella. They are more comparing it to what they have traditionally paid. So for digital, yes, I'd say for traditional outdoor, no.

We will add Jim, when Eyes on Ratings gets implemented, our CPMs in both categories are going to go up.

Okay. Kevin, is it more important to get your debt leverage below five times before you get back into digital? Or is it more important that the local guy, as you mentioned, in the second half of the year, early part of next year, start saying the demand is there?

The latter.

The latter. You look out there, you feel good. Leverage can be reduced, as you know, incredibly quickly because of the Company's operating leverage. So as EBITDA goes up, the leverage comes down quite quickly.

It almost seems the quicker you get back to digital acceleration, the quicker you can pay down leverage.

Possibly. We became a highly leveraged Company pretty quickly, and we expect to become a moderately leveraged Company fairly quickly.

Okay. Thank you.

Thank you. Our next question will come from James [Dicks], Wedbush.

Good morning, gentlemen. A couple of questions. First, if you stripped out the digital piece, what was the pro forma growth in the first quarter, and what is embedded in your guidance for the second quarter? And then second, are you starting to see a difference in the top ten advertiser categories for the digital versus the analog plans? And I guess if you don't want to get too granular on that, is there a big difference in the mix of national versus local bookings? And then last one. I think Sean, you indicated -- or you maybe Kevin, you may have indicated -- that you thought at some point, local was going to catch up to national in terms of growth. Do you have any sense as to when the catch-up is going to occur? Is that going to be a second quarter event? Or is that going to be further into the year? Thanks.

A lot to talk about there. But on the local/national issue, obviously we guided up to and I told you national was up 3%, so it might not catch up in the second quarter. We certainly hope so. We could have a little bit of a surprise on that front. And that would be good for everybody. On the digital book of business, we don't have it pro forma-ed out of our first quarter actual or our second quarter guidance. Keith is looking at me saying we can't do that. Maybe we could figure it out --

No, I don't have it --

We just don't have it in front of us. In terms of verticals for digital, we get all the same verticals, maybe a slightly different mix. Maybe one will be up a little more than another. When asked is there a particular vertical that is driving the outperformance in digital? The answer there is no. It is, quite frankly, across the board. In terms of our digital customers that use digital correctly, are just using more of it.

Okay. Just one other thing on the digital side. Do you happen to have the comps in terms of the same board growth by quarter for last year? Just so we know how tough the comps get as you go later into the year?

I don't have it in front of me. We can probably get that to you. As a general statement though, the comps on digital were easier. The beta in that product was higher. So, it sold faster and came back faster.

Just a little clarification on the verticals. We don't want to leave you with the impression that our analog verticals are the same as our digital verticals. We have got a lot more entertainment in digital and a lot more small retail in our digital than we do in our analog business. We have almost no hotel/motel business in our digital platform.

Okay. Great. That's great color. Thank you.

Thank you. Our next question will come from Peter Stabler, Credit Suisse.

Thanks very much. Sean, earlier you mentioned the sequential improvement in pricing for bulletins. but I don't believe you mentioned posters for January, February, March. Wondering if you could share that with us. And I have a quick follow-up.

Let me see. I think I have that. It is going to be a lumpier because of the way the [McDonald's] buy/sell. This year, the months are slightly different. So, for posters, I've got it. All right, January poster pricing was down 10.3%; February, 2.6%; and then March, 3.3%. And I think that sequential issue in March was the way McDonald's fell. Some of that McDonald's buy hit in March of last year and none of it hit in March of this year.

And you have got substantially better occupancy in March than you do in January, right?

Correct.

And a quick follow-up to Jason's earlier question about supply. Couple of quarters ago, you mentioned that maybe 15% of your analog plant was -- I don't know the exact words -- was non-productive or non-contributing. Wondering, is it becoming more difficult to prune non-productive static boards given that the overall environment is improving? is there a growing reluctance there?

Yes. Our local Management is beginning to tell us that we don't want to take down that board because, I promise you, Sean, I am going to sell it.

They never saw a billboard they didn't like.

You won't see as much of that activity this year. You will see some. But clearly, not as much as last year.

And as you said, you have no top down target for X percent of analog planned reduction or anything like that.

No.

No. All of these exercises we do are bottom-up.

Thank you very much.

Thank you. Our last question will come from Barton Crockett, Lazard Capital Markets.

Great. Thanks for squeezing me in here at the end. I wanted to ask about -- follow up on the CapEx comment that came earlier on the call. If I heard you right -- and this is you, Keith -- you were saying that you're going to build digital boards in 2011 at about the same pace you did in 2007, but spend less because it is cheaper to do it. I'm just wondering if I heard you correctly and if so, stepping back, we are looking at a big step up in CapEx as you think about 2011 versus 2010 in aggregate.

Let's just suppose that we are getting a whole lot of demand for digital and that we wanted to ramp it up. It's sort of 300 to 350 units in 2011. And hopefully the world is in a place where our local Management and our local customers say y, we want to do that. I think you would see digital spend -- If we did that, you would see it in the $50 million to $60 million range because of the pricing differential between what we paid in 2007 and what we have to pay today to erect a digital unit.

But also, to be clear, would you be doing that in an environment like today, where you have not much EBITDA growth, or muted EBITDA growth? Or would you only do it in an environment where you have very rapid EBITDA growth?

We are going to do it in an environment where our local General Managers tell us there is a lot of demand for digital and I need more capacity. So it is going to be driven by our professionals that run plants in the local markets that are -- they have their finger on the pulse of ad demand.

Yes, we are not going -- it's demand driven. We're not going to wait for the [EBITDA] to operate and then jump in the middle of it.

Okay. It sounds like your bias is that that is more likely than not to be the case, if you are putting this out there now. If feels like you kind of sense that that is what you are going to be looking at in 2011.

We have got a sharp V on the recovery. And we are kind of excited about the performance.

All right. That's great. Thanks a lot.

Chantelle, I want to thank all of our shareholders and friends for listening in. And we look forward to the next call.

Thank you, ladies and gentlemen. This call has now ended. You may disconnect your phone lines and have a great rest of the week. Thank you.